Case Law Details
Akram Hossain Mullick Vs DCIT (ITAT Kolkata)
Introduction: In a case that set new precedents for machinery repair expenses, the Income Tax Appellate Tribunal (ITAT) Kolkata ruled in favor of Mr. Akram Hossain Mullick. The tribunal clarified that expenses incurred on repairing machinery for running a petrol pump business are considered as revenue nature. This ruling has important implications for business owners in similar circumstances.
Analysis: Mullick was initially penalized for allegedly furnishing inaccurate particulars of income related to repair costs for machinery and buildings. However, in the course of the appeal, it was contended that these expenses, essential for the day-to-day running of the petrol pump business, should be viewed as revenue in nature, not capital. Key to this contention was the reliance on the Supreme Court’s decision in CIT vs Reliance Petroproducts Pvt Ltd.
The ITAT found merit in Mullick’s arguments, agreeing that the repair expenses did not create a new asset or confer an enduring benefit, thus should not be characterized as capital in nature. Instead, they were deemed necessary expenses incurred in the ordinary course of running the business, thus qualifying as revenue expenses.
Conclusion: This case is a vital precedent for business owners and tax consultants to consider when characterizing expenses related to the repair of machinery and buildings. The ruling serves to remind that if no new asset is created or an enduring benefit isn’t derived, such expenses should be classified as revenue in nature rather than capital, thereby reinforcing the decision of the Supreme Court in a similar case.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
1. This appeal filed by the assessee is against the order of Ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi vide Order No. ITBA/NFAC/S/250/2022-23/ 1049488929(1) dated 07.02.2023 passed against the penalty order by ACIT, Circle-47, Kolkata u/s.271(1)(c) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 28.06.20 19 for AY 20 16-17.
2. Sole issue involved in this appeal is against the action of the Ld. CIT(A) in confirming the action of the Ld. AO in respect of imposing penalty u/s. 271(1)(c) of the Act of Rs.4,49,908/-
3. Briefly stated, facts are that assessee is engaged in retailing of petroleum and diesel under the proprietary concern as M/s. M.H. Filling Centre operating petrol pump. Assessee filed his return of income on 17.10.2016, reporting total income of Rs.68,63,440/-. Case was selected for scrutiny under CASS and assessment was completed u/s. 143(3) by making certain additions and disallowances, at an assessed total income of Rs.84,74,430/-. In the course of assessment proceedings, Ld. AO observed that assessee has claimed expenses under the head repairs to machinery for Rs.6,540/- and repairs to building of Rs. 14,49,473/- which according to Ld. AO are capital in nature. Explanations were called for but all in vain, Ld. AO made a disallowance in this respect of Rs. 14,56,073/-. Penalty proceeding was initiated u/s. 271(1)(c) for furnishing of inaccurate particulars of income in this respect. In the penalty proceedings, assessee submitted his explanations. However, Ld. AO completed the same by imposing penalty @ 100% amounting to Rs.4,49,908/-. Aggrieved, assessee went in appeal before the Ld. CIT(A).
4. Before the Ld. CIT(A), a detailed explanation was furnished whereby it was contended that these expenses are revenue in nature which have been duly reported in the audited financial statements. According to the assessee, repairs to machinery is an essential incidental expense for running his petrol pump business which includes fuel dispensing machine, water pump and air compressor machines. In respect of the repairs to building, it was submitted that in case of petrol pump business, heavily loaded motor vehicles pass through the premises of the petrol pump. Further, the petrol pump is situated beside the National Highway where heavily loaded motor vehicles pass through.
4.1. It was also submitted that assessee is the owner of land where the petrol pump is set up and receives lease rent from the oil supplying company. The oil supplying company has given permission to render the trading business of motor spirit and lubricants which are the produce of the oil supplying company. According to the assessee, the entire petrol pump premises is to be handed over to the oil supplying company if the dealership agreement is terminated any time in future and any other person or concern who is appointed as a dealer by the oil supplying company shall do the business in the same premise and the assessee will continue to receive the lease rent of the land. On these submissions, it was contended that assessee is required to regularly repair the building relevant to the set up of petrol pump and incur these expenses which are revenue in nature. According to him, no new advantage of enduring benefit is brought into existence. Expense for the repairs cannot be related as heavy structural repairs except that it was routine repairs and maintenance. This only results greater efficiency by improvement of the working condition.
4.2. Ld, counsel placed reliance on the decision of Hon’ble Supreme Court in the case of CIT vs Reliance Petro products Pvt Ltd [2010] 322 ITR 158 (SC), wherein the Hon’ble Supreme Court has held as under:
“Dismissing the appeal, the court held that the CIT(A), the ITAT and the High Court had correctly reached the conclusion that the Assessee company had fully furnished all relevant details of its income and expenditure in its ROI, which were in themselves, not found to be incorrect and therefore could not be viewed as inaccurate or a concealment. The words used under section 271(1)(c) of the Act are plain and simple, and unless the case of the Assessee is strictly covered by words in this provision, no penalty can be invoked. By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing in accurate particulars. Merely because the Assessee claimed of deduction of interest expenditure has not been accepted by the Revenue, penalty under section 271(1)(c) is not attracted. If the contention of the revenue is accepted, the Assessee would be liable to penalty under section 271(1)(c) in every case where the claim made by the Assessee is not accepted by the AO for any reason. The court held that this cannot be the intention of the legislature. (AY. 2001-02) (CA No. 2463 of 2010 dt. 17-3-2010).”
5. Per contra, Ld. Sr. DR submitted that Ld. AO has examined the case of the assessee and arrived at a conclusion that the expenses are in the nature of capital, considering the quantum of expenses claimed by the assessee and, therefore, the penalty has been rightly imposed since capital expenditure has been claimed as revenue by the
6. We have heard the rival contentions and perused the material available on record. We note that the quantum of expenditure is not in dispute. The only point for our consideration is in respect of nature of the expenses which has been claimed by the assessee as to revenue or capital. From the facts and circumstances narrated above, we find force in the submission made by the Ld. Counsel explaining the case of the assessee. There is no new asset which has been created giving benefit of enduring nature. It is a case where the claim of the assessee of repairs to machinery and building as revenue expenditure has been characterized as capital in nature by the Ld. AO on which the penalty has been imposed u/s. 271(1)(c) of the Act. By placing our reliance on the decision of Hon’ble Supreme Court in the case of Reliance Petro products Ltd. (supra), we are inclined to delete the penalty imposed by the ld. AO. Accordingly, grounds taken by the assessee are allowed.
7. In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 11th July, 2023.
